An audit is an examination of a company’s policies, procedures, and records, typically conducted by an outside reviewer who determines whether the financial statements and other materials fairly state the company’s position and standing. The majority of the material reviewed during a business audit relates to the financials and accounting documents of a company. The auditor will provide a written opinion report in accordance with the Generally Accepted Accounting Principles (GAAP). There are four possible outcomes of a business audit: unqualified opinion, disclaimer of opinion, qualified opinion, and adverse opinion.
Unqualified opinion
If the auditor reports an unqualified opinion, it provides assurance that all financial statements reviewed present the financial position of the company fairly and with no reservations. An unqualified opinion is actually the best possible outcome of a business audit, even though it might sound uncertain. It can also be called a clean opinion. When you receive an unqualified opinion as the outcome of your company audit, potential creditors, investors, and others who read the results can trust the accuracy and reliability of the financial information.
Disclaimer of opinion
A disclaimer of opinion outcome on an audit means that the auditor is expressing no opinion on the financial information reviewed. This could happen if the auditor is looking at financial statements of the current year, but there was no audit on the previous year of statements. Without a clear understanding of the year-over-year changes, it’s difficult to perform an accurate audit. Therefore, the auditor may give a disclaimer of opinion to show that they reviewed financial statements that weren’t in accordance with GAAP or generally accepted auditing standards.
Another reason that an auditor would give a disclaimer of opinion is if they are somehow linked with the company. It is difficult to produce subjective results on an audit when the auditor is not independent of the company, so this result could indicate some connection.
Qualified opinion
A qualified opinion means that the auditor saw something problematic in the financial documents, accounting procedures, or applications. The auditor might disagree with how company leaders are dealing with specific transactions within the current year. Another reason the auditor might give a qualified opinion result is if they can’t establish the possible outcome of certain procedures used by management or accounting professionals within the company. The qualified opinion means that there is something that the auditor feels uncertain about, and the opinion report will include scope limitations to specify the reasoning for the result.
Adverse opinion
The worst outcome of a business audit is an adverse opinion, which means that the auditor feels that the financial statements do not represent the financial position of the company. When giving this result, the auditor looks at accounting procedures and processes used by the company and compares them with GAAP. Your company could receive this result if it departs from these principles in valuations of liabilities or assets or when conducting business transactions. In the report, the auditor will clearly specify the problems that result in the adverse opinion.
Company audit
For many small business owners, the biggest concern is what to expect from an audit. In most cases, a business audit isn’t as scary as it might sound. Unless your accounting department or executives are deliberately committing fraud, you don’t have a lot to worry about. You may end up spending a lot of time preparing the documents for review, but most auditors provide plenty of time to get ready for the audit.
Some audits are conducted by mail, while others involve an auditor coming to your office to look at the documents. In-person audits take more time, since you typically must meet with the auditor first either in their office or by phone to discuss the specifics of the audit. You will also need to set aside several hours on each day that the auditor will spend in your office. Understanding why you are being audited and preparing for the experience can help alleviate some of the stress you might feel.
Why the auditor is coming
Audits usually happen when something changes within the financials of your business. For example, if your company was reporting and paying taxes on revenue of several hundred thousand dollars for a couple of years in a row, and the amount suddenly increased one year, you would probably receive an audit notice. Being audited doesn’t mean that your company or accounting department did anything wrong, although it does usually mean that someone thinks that is a possibility. Your responsibility is to provide accurate documents and information to prove otherwise, showing that the revenue and other financial data are correct.
If the auditor does find errors or inaccurate information, your company will usually have time to correct the mistake. Don’t assume that an honest mistake is grounds for legal action. You can simply fix the error and correct your accounting process to avoid mistakes in the future. If the mistake caused your business to pay taxes incorrectly, you will be responsible to pay the correct amount.
Prepare every document
If the auditor requests a document, you will need to have it ready at a moment’s notice. When a company can’t produce documentation, the auditor tends to get suspicious. The auditor may begin making assumptions based on GAAP, but this can work against your company. It’s best to have all paperwork prepared before the auditor shows up, so that you can provide anything requested and eliminate suspicion. Keep copies of bank statements, receipts, invoices, and other financial documents throughout the year and file them in a place that is easily accessible.
Digital copies are fine, as long as you can pull them up and print them out as needed. Run a backup on your files every night to make sure you have everything when you need it.
Manage expectations
Don’t assume that your audit will be over in a day. Most audits take a lot of time, especially when the auditor is meeting with you in person. In between contacts, your auditor will be working on your file, so you might go weeks or even months without hearing anything. If it’s a simple audit on a smaller company, it could take several weeks. Some audits take a year or more.
You can ask your auditor for an estimated timeline, but it’s best to assume that you’ll be working with them off and on for months. When you manage your expectations and understand the process, you won’t have to spend hours waiting by the phone or mailbox when the reality is that you probably won’t hear anything for a while.
Hiring a representative
Many executives and business owners simply don’t have the time to deal with the requests associated with an audit. Another option is to hire a representative to work with the auditor and handle all requests that come through. If you decide to hire someone, you will want to make sure that the person you choose has experience with company audits and understands the necessary steps in the process. When you hire an outside person, you can focus on the needs of your company instead of worrying about pulling and providing documents.
Hiring a representative does come with a cost, and the billable amount can vary depending on how much time your audit takes. Your company will be responsible to pay the representative regardless of the outcome of the audit, so if you choose to go this route, make sure you can afford the potential fees if your audit takes a year or more.
A company audit usually isn’t an enjoyable experience, but many business owners will face one at some point. Auditors are typically looking for red flags, such as the following:
- Lack of financial documentation to back up the reported revenue on tax documents
- A company that handles a lot of cash
- A large amount of write-offs
- Inaccurate reporting on tax documents
- Payroll tax return irregularities (if your company has employees)
- A high number of independent contractors
When you receive the notice in the mail that your business is being audited, try not to stress too much. Take the time to prepare the necessary documents and get ready for the process. With the right preparation, you can go into an audit with confidence. The purpose of an audit is to make sure that you’re doing everything correctly within your business, which is probably your goal and the goal of any executives that run the company as well.